Audit Evidence | Auditing and Ethics for CA Intermediate PDF Download

What is Audit Evidence?

Audit evidence comprises the data and information auditors gather to assess a company's financial reports and transactions. These reports often require verification to confirm their authenticity, a process typically performed by auditors or Certified Public Accountants (CPAs). Therefore, evidence is essential to validate the accuracy of these reports. Sufficient audit evidence is typically deemed adequate when a company's claims in its financial statements align with the accounting regulations within its legal framework. Without proper audit evidence, the audit process cannot be successfully concluded, highlighting the necessity of such evidence to complete the task.

• Audit evidence refers to the data or information utilized or gathered by inspectors as part of their review process to form their opinion on whether financial statements are prepared in all material respects and in accordance with relevant financial reporting frameworks.
• Prior to concluding financial statements in whole or in part, inspectors must ensure that the evidence they obtain is of sufficient quality and quantity to draw conclusions.
• Adequate and appropriate audit evidence is crucial for inspectors to form audit opinions. Additionally, the audit risks that inspectors may encounter depend on the adequacy and appropriateness of the evidence.
• Inspectors obtain audit evidence throughout all stages of the audit, including planning, execution, and completion stages. To gather this evidence, inspectors employ various tools and techniques tailored to their needs.
• This article will explore various aspects related to audit evidence, including types of evidence, methodologies used by inspectors to gather evidence, and its quality.

Factors that Influence the Reliability of Audit Evidence

• Audit evidence is deemed more reliable when sourced independently from outside the company or firm.
• The reliability of audit evidence is significantly influenced by how it is documented. Records in legal formats, whether in paper or electronic form, are generally considered more reliable.
• The effectiveness of controls implemented by the company or firm also plays a crucial role in determining the reliability of audit evidence.
• Direct acquisition of audit evidence from a Certified Public Accountant (CPA) or auditor typically yields more reliable results compared to obtaining evidence indirectly or through inference.
• Original audit evidence documents are considered more reliable than photocopies or duplicates.

Characteristics of Audit Evidence

• Relevance: The relevance of audit evidence depends significantly on the type of audit being conducted and how directly the information relates to the overall analysis.
• Source: A major determinant of audit evidence reliability, external sources are typically preferred over internal ones due to their perceived lack of bias.
• Nature: Audit evidence is often deemed adequate when presented through presentations, physical confirmations, or legal documents.
• Sufficiency: The sufficiency of audit evidence considers the substance of the information provided, such as bank statements, which aids in assessing the company's financial status.

What are the sources of Audit evidence?

• Physical Observations: Auditors validate both tangible and intangible assets through on-site inspections and direct observations, often as part of inventory audit procedures.
• Original Source Documents: This involves tracing claims made in financial statements back to their original documents. Auditors verify these claims by comparing them to asset sale invoices, ensuring accuracy and authenticity.
• External Data: Some company assets may be actively traded in financial markets. Auditors note whether these assets are reported at their cost or market value in the financial statements, highlighting the importance of audit evidence characteristics in such cases.
• Recalculations: Auditors receive all recorded documents and transactions used to prepare financial statements, which are then cross-checked against the company's own financial statements. This verification process is known as recalculations.

Types of Audit Evidence

Types of audit evidence can take various forms, both physical and non-physical. They may include sensory visuals such as videos, along with non-physical formats like emails and audio recordings. Here are some examples of audit evidence types:

Financial Documents:

• Invoices and receipts
• Fixed assets registrations
• Management accounts
• Payroll system
• Bank documents
• Balance sheets, profit and loss accounts, cash flow statements, and other financial documents
• Accounting information and other financial records of the company

Confirmation and Inspection of Documents:

• Recalculation and client inquiry

Audit evidence comes in different forms and sources, including data, physical records, and non-physical records. For example:

• Budget reports
• Accounting data
• Bank statements
• Management accounts
• Fixed Assets Register
• Payroll listings
• Bank confirmations
• Invoices
• Receipts
• Other records used by companies to support financial transactions or events in financial statements.

Audit evidence can also be in video, email, audio, and verbal formats.

Methods for Obtaining Audit Evidence:

• Auditors use various techniques to gather audit evidence to support their conclusions.

What is the Reason for Evaluating?

Evaluation methodology encompasses review requests, review observation, review assessment, analytical procedures, review recalculations, review confirmations, and re-performance.

• Review Request: Auditors seek information from management regarding specific transactions or events to gain clarity or to validate certain assertions.
• Review Observation: Auditors observe how certain controls related to financial reporting operate.
• Review Inspection: Auditors scrutinize specific documents or evidence related to financial transactions or events.
• Analytical Procedure: Auditors use analytical techniques to assess transactions or amounts in financial statements using other financial and non-financial data.
• Recalculation: Auditors sometimes recalculate depreciation expenses prepared by management.
• Re-performance: Auditors may re-perform bank reconciliations prepared by the client.

Nature of Audit Evidence:

• The quality of audit evidence is crucial to ensure the accuracy of the auditor's conclusions.
• If the information is unreliable or of poor quality, the risk of making incorrect audit opinions is high.

The nature of audit evidence depends primarily on its form and source. Here are the details:

• External Source: Evidence obtained directly from external parties like customers, suppliers, or banks is more reliable than evidence obtained from clients. For example, accounts receivable confirmations obtained from clients' customers are more reliable than those prepared by clients.
• Prepared by Auditor: Evidence prepared by auditors themselves is more reliable than that prepared by or obtained from the client. For example, a bank reconciliation prepared by the auditor is more reliable than one prepared by the accountant.
• Prepared by Customer: The reliability of evidence obtained from clients depends on the reliability of the client's internal controls.
• Written Form: Audit evidence in written form is more reliable than verbal evidence. For example, management confirmation via email is more reliable than verbal confirmation.
• Original Form: Original invoices used to support payment transactions are more reliable than duplicate invoices.

Given the importance of the nature of audit evidence, regulatory bodies overseeing audit firms require these firms to have appropriate audit manuals, policies, and procedures in place to maintain the quality of audits and the quality of audit evidence.

Using Assertions in Obtaining Audit Evidence:

• Auditors should design audit procedures to confirm and verify the assertions made in the financial statements as part of their materiality assessment in the financial statements.
• Additionally, auditors can tailor their procedures to obtain audit evidence to support their verification and confirmation of assertions in financial statements.

Assertions for Classes of Transactions and Events:

These assertions are used by management to confirm the accuracy and completeness of financial transactions and events in the income statement.

These assertions include:

• Occurrence: Transactions recorded in the financial statements, especially in the income statement, are actual transactions.
• Completeness: All transactions and events that should be recorded in the period have been recorded.
• Accuracy: Amounts and other data related to recorded transactions and events have been accurately recorded.
• Cut-off: Transactions and events have been recorded in the correct accounting period.
• Classification: Transactions and events have been recorded in the appropriate accounts.

Assertions for Account Balances:

These assertions are used by management to confirm the existence and completeness of balances in balance sheet items.

These balance sheet assertions are:

• Existence: Assets, liabilities, and equity interests exist.
• Rights and Obligations: The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
• Completeness: All assets, liabilities, and equity interests that should have been recorded have been recorded.
• Valuation and Allocation: Assets and liabilities are included in the financial statements at appropriate amounts and allocated to the correct periods.

Presentation and Disclosure:

• Occurrence and Rights and Obligations: Disclosed events, transactions, and other matters have occurred and relate to the entity.
• Completeness: All disclosures that should have been included in the financial statements have been included.
• Classification and Understandability: Financial information is appropriately presented and described, and disclosures are clearly expressed.
• Accuracy and Valuation: This assertion concerns the accuracy of the information reported in or noted in the financial statements. It also concerns the valuation of the reported account balances. There should be procedures for obtaining this evidence.